U.S. stocks rallied, sending the Standard & Poor’s 500 Index (CME:SPZ13) toward a record, as the Senate crafted a deal to end the government shutdown and raise the debt ceiling before tomorrow’s deadline.
All 10 main industries in the S&P 500 gained at least 0.4%, with financial shares advancing the most. Bank of America Corp. jumped 2% as lower legal expenses and loan losses helped profit rebound. Mattel Inc. increased 1.1% after reporting earnings that topped analyst estimates.
The S&P 500 rose 1.1% to 1,716.89 at 3:33 p.m. in New York. The benchmark gauge slid 0.7% yesterday after climbing 3.3% over the previous four days. The Dow Jones Industrial Average gained 161.77 points, or 1.1%, to 15,329.78 today. The Nasdaq Composite Index climbed 1.1% to the highest level since 2000. Trading in S&P 500 stocks was 16% above the 30-day average at this time of day.
“Investors are relieved that it looks like we’re not going to go over the cliff,” Ben Hart, a research analyst at Radnor, Pennsylvania-based Haverford Trust Co., which oversees about $6 billion, said by phone. “It takes the worst case scenario off the table.”
The S&P 500 dropped 4.1% from its all-time high of 1,725.52 reached Sept. 18 as Congress struggled to reach agreement on a federal budget, forcing the first partial government shutdown in 17 years. The gauge has recovered 3.7% of the decline as optimism grew that a deal would be reached, and is within 10 points of its record. The S&P 500 is up 20% for the year.
Debt Limit
The bipartisan leaders of the Senate reached an agreement to end the fiscal impasse and to increase U.S. borrowing authority. The Senate and House plan to vote on it later today, and the White House press secretary said President Barack Obama supports the deal.
The framework negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations.
The agreement concludes a four-week standoff that began with Republicans demanding defunding of Obama’s 2010 health-care law, and objecting to raising the debt limit and funding the government without policy concessions.
With no deal, the U.S. would exhaust its borrowing authority tomorrow and the government may start missing payments at some point between Oct. 22 and Oct. 31, according to the Congressional Budget Office. Fitch Ratings put the world’s biggest economy on watch for a possible credit downgrade yesterday, citing lawmakers’ inability to agree.
Short Sales
The S&P 500’s advance over the past week has squeezed managers who borrowed and sold shares to bet on declines lawmakers would struggle to reach a deal. U.S. companies with the most short sales have climbed 4.7% since Oct. 9, compared with a 3.9% advance for the benchmark gauge, data compiled by Bloomberg and Goldman Sachs Group Inc. show.
Hedge funds, whose bearish bets on stocks have held their returns to half the Standard & Poor’s 500 Index in 2013, helped send a gauge of manager bullishness compiled by ISI Group LLC within 0.2 point of its lowest reading in 2013 last week.
Equities have surged in 2013 as the Federal Reserve maintained efforts to stimulate the economy by holding interest rates near zero% and purchasing $85 billion of bonds each month under a program known as quantitative easing.
Broad Rally
The rally in 2013 has been the broadest in at least 23 years, with S&P 500 companies extending the streak of quarters in which they have avoided an earnings contraction to 15 and valuations holding below historic averages. Of S&P 500 members, 443 are up so far in 2013, data compiled by Bloomberg show. The next-closest year was 1997, when 436 companies had advanced and the index was quadrupling.
Profits for companies in the index probably increased 1.4% during the third quarter while sales rose 2%, according to analysts’ estimates compiled by Bloomberg. Some 22 companies in the S&P 500 are due to post results today.
U.S. economic growth remained “modest to moderate” as consumer spending maintained gains and business investment grew, the Fed said today in its latest Beige Book business survey. Four of the 12 Fed districts reported slower economic growth while eight others said the expansion held steady amid “uncertainty” stemming from the U.S. fiscal deadlock.
The report provides policy makers anecdotal accounts from the Fed districts two weeks before they meet to set monetary policy.
Volatility Gauge
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, dropped 19% to 15.08, the biggest decline since April, after surging 16% yesterday.
Financial, health-care and phone companies rallied more than 1.5% today. The Dow Jones Transportation Average climbed 1.2%.
FedEx Corp. surged 2.3% to a record $122.87, adding to yesterday’s 4.1% advance. The operator of the world’s largest cargo airline authorized a buyback plan of as many as 32 million shares, its biggest repurchase program ever.
Bank of America jumped 2% to $14.53. Chief Executive Officer Brian T. Moynihan, 54, has said the “lion’s share” of costs tied to disputed mortgages are behind his bank after booking more than $45 billion tied to his predecessor’s 2008 takeover of Countrywide Financial Corp. after third-quarter profit beat estimates.
JPMorgan Chase & Co. surged 3.1% to $53.94 and Goldman Sachs Group Inc. advanced 2.7% to $161.87 for the biggest increases in the Dow.
KeyCorp gained 2.2% to $12.12 and PNC Financial Services Group Inc. advanced 1.7% to $73.76 after both banks beat third-quarter profit estimates. The KBW Regional Banking Index rose 1.3% as 49 out of 50 members gained.
Mattel, Abbott
Mattel climbed 1.1% to $41.99. The world’s largest toymaker topped estimates as sales of Barbie and American Girl gained. The company has been trying to boost sales amid lackluster growth of the toy industry in the U.S., the company’s largest market, as kids spend more time using electronic devices.
Abbott Laboratories jumped 6.2% to $35.81 for the biggest gain in the S&P 500. The provider of health-care diagnostics and medical devices reported third-quarter results that surpassed analyst estimates and raised its dividend by more than half. Revenue rose 2% to beat company estimates on increased demand for diagnostic tests. Abbott spun off its drug business into a new company earlier this year.
Stanley Black & Decker Inc., the maker of power tools and electronic security systems, tumbled 14% to $76.69 for the largest drop in the S&P 500. The company cut its full-year earnings outlook on slower-than-anticipated improvement in margins in its security business and weakness in emerging markets, as well as uncertainty created by the U.S. government shutdown.
